In the UK, royalties from online services jumped by 32% last year, according to a report from PRS for Music, the Performing Right Society in the United Kingdom for composers, songwriters and music publishers. In fact, royalties from online services (including both streaming and downloading) now produces more revenue than radio, according to the new report.
The growth figure reported by the UK body is very similar to the percentage increase recently reported by SoundExchange, the licensing and collection organization for performance royalties in the US. The 2012 reported figure for royalties collected in the US in 2012 was $502.2 million, a 35% increase over the 2011 number.
What’s different of course is that in the US, performance royalties are not paid by broadcast radio services, so a comparison of online versus royalties from radio sources cannot be made.
On May 23 in Brussels we’ll be discussing the business of Internet radio and online audio at RAIN Summit Europe. View the speaker list and agenda here.
Royalty payments from SoundExchange set a record in 2012, and exceeded the previous year by 58%. Payments to artists for performance made by Internet radio, satellite radio and cable radio services hit $462 million. Payments for performances made by subscription services are not included in these figures.
“SoundExchange’s increasing annual royalty payments are a positive indication of where the industry is heading. As digital radio continues to grow, so should the amount that performing artists and rights owners receive for the use of their content,” said SoundExchange President Michael Huppe. “Our distribution represents another record-breaking year for SoundExchange, but more importantly, it means more money in the pockets of the creators of music. We’re optimistic about the industry’s future, and look forward to maximizing digital performance royalties for the people we serve and finding new ways to propel the music industry forward.”
To be accurate it’s important to understand that not all of this money ends up in the hands of “creators of music.” According to Billboard, first, SoundExchange takes 5.3% off the top for administrative fees. After that, the “net” figure gets divided up as follows: record labels, or owners of the sound recording, get 50%. Performance artists get 45% and session musicians and backup singers get 5%.
Earlier this year it was estimated that Pandora was responsible for 37% of that record breaking number collected by SoundExchange. While SoundExchange doesn’t specifically report the figure they pay for performance royalties, they do report a “content acquisition fee”, which topped $182 million through their Q3 of 2012.
The following is a guest post by Angus MacDonald, General Counsel, Live365:
A few days ago, SoundExchange publicly released its Annual Report (Draft) for 2011. According to the report, SoundExchange’s 2011 collections from ALL statutory services amounted to $371.9 million. See SX’s Annual Report, p.7 (“In 2011, SoundExchange collected statutory royalties from all statutory classes of services in the amount of $371,922,621.”). That’s an increase of 40% ($106M) in collections compared with the previous year – i.e., $265.9M in 2010 vs. $371.9M in 2011.
Impressive increase. However, as discussed below, Pandora accounts for most (over 70%) of that growth. In its most recent 10-K filing (released about 3 weeks ago) for the fiscal year that ended Jan. 31, 2012, Pandora paid 49.7% of its revenues to SoundExchange. See Pandora’s 10-K , p.20 (“For our fiscal year ended January 31, 2012 we incurred SoundExchange related content acquisition costs representing 49.7% of our total revenue for that period.”).
Using the 49.7% figure (along with Pandora’s recently-reported revenue of $274.3M for its last fiscal year) means that Pandora paid $136,346,980 to SoundExchange in the 12 months that ended Jan. 31, 2012. That $136.3M figure represents 36.66% of SoundExchange’s total revenues ($371.9M) collected in CY2011. [NOTE: For the purposes of this exercise, I’m comparing Pandora’s FISCAL year (Feb. 1, 2011 to Jan. 31, 2012) to SoundExchange’s 2011 CALENDAR year, even though it’s not entirely apples-to-apples.]
That 36.66% figure certainly would be much higher – well over 50%, I’d safely bet – if you look only at SX’s Internet-radio revenues, which are NOT separately broken out in SX’s Annual Report. [As many of you know, SoundExchange collects statutory royalties from many different types of services – including noninteractive Internet radio (Pandora, etc.), satellite (Sirius XM), cable subscription services (Music Choice), and business establishment services (DMX).]
Pandora’s royalty payments to SoundExchange more than doubled year-over-year – $61.99M in FY2011 vs. $136.35 in FY2012. That $74.35M increase in royalties paid by Pandora accounts for MOST – i.e., over 70% – of SoundExchange’s increased revenues ($106M increase) for 2011.
Another interesting factoid: Pandora paid about as much in royalties for its FY 2012 (i.e., $136.3M) as it made in TOTAL REVENUES for its previous fiscal year, FY 2011 ($137.7M).
My own editorial: With Pandora’s ever-growing listening hours and royalty payments, SoundExchange and the labels need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020). This is especially true if Sirius XM continues to sign up more direct license deals, thereby bypassing SoundExchange (though Sirius XM’s recent antitrust complaint suggests that may be a tough row to hoe).
There are several other semi-interesting tidbits from SoundExchange’s Annual Report, including its mini-hiring binge in 2011 (55 employees in 2010 vs. 72 employees in 2011) – which was probably necessary to handle all of the additional royalties from Pandora!
2011 revenues for the record industry from streaming music royalties jumped to more than half a billion dollars, according to a year end report by RIAA. Revenues from subscripton services (like Spotify, Pandora One, Rdio, MOG, Slacker) jumped 13.5% to $241 million, and Digital Performance Royalties, paid by all other streaming services (including Pandora) rose 17.2% to $292 million.
In its fiscal year ended January 2012, Pandora paid out more than $285 million in “content acquisition”, the bulk of which is performance royalties to SoundExchange. The time periods don’t match up perfectly because the RIAA report is calendar year, but you get the picture — Pandora’s paying a huge amount to SoundExchange.
Which should make for an interesting next round of negotiations for streaming royalty rates. Tim Westergren has always been very vocal on this topic, stating over and over again that he’s not against a royalty, but that the current costs are too high. With the next round of CRB hearings looming, he’s talking about it again. But this time, he’s coming to the table with over a 100 million registered users. And he’s SoundExchange’s biggest customer.
Pandora’s also got a lot of investors, and they’re working that crowd as well, including this statement in their recent SEC filing:
“Since our inception in 2000, we have incurred significant net operating losses and, as of January 31st, 2012, we had an accumulated deficit of $101.4 million. A key element of our strategy is to increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses.”
This new revenue report from the RIAA shows very clearly that the recording industry is becoming increasingly dependent on the streaming industry as a very real source of bread and butter.
Roughly 23% of Sound Exchange’s total revenues in 2010 came from Pandora, based on publicly reported info and some quick math by Live365 Attorney Angus MacDonald.
According to SoundExchange‘s Annual Report for 2010, the collections agency for the RIAA collected statutory royalties from all statutory classes of services in the amount of $263,593,310. That number includes royalties from services other than webcasters, such as satellite, cable services and subscription services.
According to Pandora’s recent SEC filing (dated 5/26/11), Pandora’s revenues were $137,764,000 for its last fiscal year, which ended Jan. 31, 2011. MacDonald notes that his comparison uses Sound Exchange’s calendar year reporting and Pandora’s fiscal year reporting which is February 2010 through January 2011, so it’s not entirely accurate, but very close.
MacDonald uses a factor of 45% as the percentage of Pandora’s overall revenues that the service pays to SoundExchange because that was the percentage that the service paid in their fiscal 2010 year. However, MacDonald also notes that with the newest quarterly report, Pandora’s percentage of revenues owed to Sound Exchange has increased to 53%.
Says MacDonald, “Using the lower figure – i.e., 45% – means that Pandora paid $61,993,800 ($137,764,000 * 0.45) to SX in the 12 months that ended Jan. 31, 2011. That $62 million is 23.52% of SX’s total revenues ($263.6M) collected in CY2010.” He adds that this is 23.5% of Sound Exchange’s overall revenues, the percentage of revenues the agency sees from Internet radio alone would be much higher.
SoundExchange, the performance rights organization that collects royalties on the behalf of sound recording copyright owners, has exercised its right under the Digital Media Copyright Act to request that access to a webcasting platform be disabled. SWCast is a platform that has offered a streaming solution to smaller webcasters that may not have the funds to develop their own streaming platform. “DJ your own web radio station.” says the site, offering “clearance to legally broadcast your music” along with technical support, streaming audio software and other tools.
According to SoundExchange, SWCast has failed to make any payments for royalties incurred after 2005 and has not filed reports necessary for compliance, while collecting monthly fees from webcasters for those payments and reporting services.
Randall Krause, President and CEO of SWCast, in a letter posted on his website, does not deny the claims and says he is “committed to ensuring that we reconcile any and all compliancy concerns of SoundExchange going forward.”
Meanwhile the more than 100 webcasters that were streaming with SWCast are left looking for another streaming partner – not to mention the monies they were paying thinking they were covering their royalties. Jason Stoddard, Live365’s Director of Broadcasting Sales, says there’s always room for them in their network. “While the disabling of SWCast is an unfortunate event for many webcasters, our ongoing dedication to complying with all royalty regulations means they still have a place to go.”
By everything I have read, the stations that were streaming with SWCast had no idea they were not compliant. While it seems that they were eclectic stations with smallish audiences, the betrayal of the stations and their listeners is not small at all. By all that I can see, SWCast represented that they covered all the licensing obligations for its stations. And SoundExchange hasn’t received payments for any period since 2005? All I can say is, what took SoundExchange so long?
Broadcasters who intend to claim coverage by the new NAB/Sound Exchange settlement must file a notice with Sound Exchange of their intention by April 2, 2009. According to Broadcast Law Blog’s David Oxenford. A recent post provides a comprehensive overview of the negotiated deal between the National Association of Broadcasters and Sound Exchange.
Streaming Broadcasters Get Some Rate Relief
Oxenford details the rates, which represent some savings under the CRB rate for the years between 2007 and 2011. These rates are paid on a per song, per listener basis, and include a minimum fee of $500 per channel.
New Reporting Requirements
Recordkeeping details are also provided – broadcasters who elect this settlement option will be required to provide census reporting, detailed monthly reports to SoundExchange about each song that they play – including the song title, artist, album, and the ISRC code or marketing label for that song. The information must include how many listeners there were for each song played. According to Oxenford, SoundExchange has long sought census reporting from webcasters, who are currently required to report only on the music played for two weeks each quarter.
Check Oxenford’s blog for more complete information and links to the actual notice that streaming broadcasters must file with Sound Exchange. Read more about the history behind this settlement and its potential business impact in an earlier Audio4cast article here.
Internet radio station Jango made news this week announcing it’s “pay for play” service for emerging artists. Musicians can purchase 1000 plays or listens to their song for $30. The station works like Pandora and other stations that allow listeners to design their own station by entering the names of artists they like to listen to, and then deliver those artists along with other, similiar sounding music based on those preferences.
For musicians that are looking to connect with listeners, it sounds like a great deal – for $30 they’ll get played 1000 times to listeners who have an affinity for their kind of music. According to their press release, Beta testing of Jango Airplay shows strong enthusiasm from artists for guaranteed spins to a targeted, receptive audience – and from Jango listeners to engage with up-and-coming acts and actively contribute to their success. On average, $30 spent on 1,000 plays results in 100 positive actions from listeners who say they like the artist, write a comment, and/or become a full-fledged fan.
Musicians who receive positive ratings from listeners can also earn more free airplay. Once they get 50 positive ratings, they get added into the free rotation of music on the station – in other words, they have proven themselves with the audience and get rewarded with increased play. Plus, artists can communicate directly with their new fans, and get more information about the people who like their music.
As mentioned in RAIN yesterday, Doug Perlson wrote a piece last fall about legal payola as a revenue model for struggling webcasters, which generated buzz in some industry blogs. His piece put forth the idea that since the performance royalty forces web stations to pay for the rights to play the music, and places no value on the promotion that artists get from their music being played, that stations should then also charge record companies/musicians for the plays.
The way that Jango has structured this makes it very palatable for both the listener and the musician. The listener has control in selecting what they want to hear and can rate the music after they hear it. The musician gets more control over how often their music gets played and the chance to connect with listeners who like their stuff.
As David Oxenford mentions in his blog last fall on the topic, stations like Jango are likely obtaining permission to play the music royalty free as well – so they win twice – by monetizing the plays, and by avoiding the performance royalty fees (for that music).
This concept presents an interesting twist in the Internet radio business model, and one that may well have traction given the high performance royalties that stations are obligated to pay to play the music. Now it’s come full circle – the musicians pay the stations to play their music and the stations pay the musicians to play the music.